From the COMEX exchange’s weekly position reports, the commercial traders increased their net short position from June 3 to July 8 by more than 240 million ounces. This amount represents nearly 30 percent of annual worldwide new silver mining production. Normally such a huge influx of “silver” on the market in such a short time, even though it is in paper contracts rather than physical form, would lead to a significant drop in price.
Instead, the spot price of silver at the New York COMEX close jumped from $18.73 on June 3 to $21.41 at the close on Friday, July 11, an increase of 14.3 percent.
Could this influx of paper silver represent sales by mining companies of future production? Partially. Almost 25 percent of the growth in short positions from June 3 to July 1 came from the bullion bankers who handle such transactions. However, more than 75 percent of the net increase in short positions came from the 24 swap dealers (which probably includes Goldman Sachs).
Since the bulk of the increase in short positions comes from commercial speculators as opposed to investor speculators, it is quite possible that there could be a near term silver supply squeeze. Trying to prevent such a development could be the reason that these bullion banks stuck their necks out so far. This influx of 240 million ounces of new short contracts costs the owners $2.4 million for every one cent increase in the silver spot price.
Gene Arensberg has a great article on this subject, which can be read at http://www.gotgoldreport.com/2014/07/swap-dealers-goal-line-stand-for-comex-silver-futures-in-jeopardy-squeeze-very-possible-now.html.
There was another significant development in the silver market this past week. Many of you already know that the London silver fix will end after Aug. 14. It was announced last Friday that CME Group (owner of the COMEX) will take over pricing of the new “fix,” Thomson Reuters will handle the administration and reporting of the new “fix,” and the London Bullion Market Association will screen the companies that wish to contribute to this process.
For the most part, I think this arrangement will be relatively neutral for silver prices. There are some industrial users and investors who really prefer to price contracts on a fix, so the continuation of the process should not chase away this part of demand.
However, I have some concerns about the involvement of the CME Group. In January 1980, the COMEX unilaterally changed its rules to prohibit any investor from purchasing new silver contracts on its exchange. Those who already had contracts were only allowed to hold them until maturity or to sell them before maturity. This rule change, probably done with the permission if not the direction of the U.S. government, was a major reason that silver prices then quickly fell. My largest concern is that the COMEX is today in a similar position to distort and manipulate the silver market price again.
As a result of higher spot prices, premiums mostly have declined for bullion-priced physical silver products. An ounce of physical silver that might have sold for $2 over spot at the beginning of June and is still selling at the same formula relative to spot is now selling at a lower percentage premium. In addition, the supply of people liquidating coins, such as U.S. 90 percent silver coins and circulated Morgan and Peace silver dollars has increased, pulling premiums down further than just the change in the spot price. For 90 percent silver coin, you can now purchase it for about 40 cents per ounce closer to the spot price than at the beginning of June. The selling price of very good or better common-date Peace silver dollars is now actually lower today than it was at the beginning of June, despite the significant increase in the spot price.
The question everyone has is what will happen next with the silver market? If there was ever a time when there was a strong likelihood of the price breaking out of the doldrums and surpassing $22 and even $25 per ounce, that time is now. But, as we know from so many false starts followed by further drops that what would make sense to happen is not always what actually occurs.
I expect the silver spot price to at least double before the end of 2015. Will the move in that direction start soon? There is a very good chance of that. From the increase in outstanding COMEX futures contracts, it appears that investors are convinced of the opportunity to make huge profits on the long side of silver contracts. Yet, even if the recent increase fizzles out again, I still stand by my forecast for the end of 2015.
Patrick A. Heller was the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He owns Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Coin Week (http://www.coinweek.com and http://www.coininfo.com). He also writes a bi-monthly column on collectibles for “The Greater Lansing Business Monthly” (http://www.lansingbusinessmonthly.com/articles/department-columns).His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com).